Joseph Mullica

Joseph Mullica

Joseph Mullica

Economic Forecast Hinges on Tax Reform

Feb 09, 2018

Market Trends

Economic Forecast Hinges on Policy, Tax Reform

The economy could get a lift from tax reform, with homebuyers and homeowners likely having more income, but less in the way of write-offs, according to Fannie Mae's Economic and Strategic Research (ESR) Group's recently released Economic and Housing Outlook for January 2018. Analysts believe housing will again be marked by short supply this year.

"The new tax laws are likely to motivate a mixed response in the housing market: Increased disposable household income should lead to greater housing demand, but changes to deductions essentially reduce the subsidy for homeownership," says Doug Duncan, chief economist at Fannie Mae. "On balance, we expect the housing market in 2018 to encounter many of the same challenges as last year, including inventory shortages, particularly in the middle and lower-end of the market, and affordability headwinds."

Analysts anticipate GDP will increase 2.7 percent, as well as a tumbling unemployment rate - if policymakers step up.

"The question for 2018 is less about the impacts of the tax cuts for consumers and corporations than about how the Fed manages the pace of monetary policy normalization amid a stimulative fiscal environment," Duncan says. "As we see it, the traditional view of a trade-off between employment and inflation lacks solid empirical support in recent decades, and aggressive monetary policy to ward off a potentially overheating economy may do more harm than good. Managing a 'soft landing' will be a difficult but critical task for policymakers in 2018."

Analysts also expect the Federal Reserve to hike the key interest rate, which can affect the cost of a loan, including mortgages, at least twice this year. The Fed raised the rate three times in 2017.

Fannie's forecast comes on the heels of another outlook released by Freddie Mac, which anticipates a boost in home prices, sales and starts in 2018.